How California’s Renewable Quotas and Carbon Limits Could Affect Electricity Markets

In the California electricity crisis in 2000 and 2001, tangled regulations and opportunistic traders led to soaring wholesale prices and rolling blackouts. The state’s wholesale power market today is more complex, with the addition of carbon emission allowances and renewable energy certificates. Is California set for a another market crisis?

Research led by Stanford economics Professor Frank A. Wolak; Mark C. Thurber, associate director for research at Stanford’s Program on Energy and Sustainable Development; and doctoral candidate Trevor Davis is shedding light on that question through an electricity-trading game that incorporates California’s cap-and-trade system for reducing greenhouse gas emissions and its mandate to produce 20% of electricity from renewable sources.

Unexpected results have emerged, such as teams cornering the market on renewable energy certificates, then charging sky-high prices to electricity retailers that still needed to buy certificates as the compliance deadline drew near. Using the game, staff of the California Public Utilities Commission learned how forward contracting and demand response could help mitigate market power. Incoming Stanford graduate students competed using this game at the weeklong Energy@Stanford&SLAC conference in September 2015.